As a footnote to the following article, I was on a plane to the IMN conference on 1/18/17. Much to my surprise one of the passengers was Congressman David Schweikert of Scottsdale. Mr. Schweikert sits on the House Financial Services Committee.

As soon as the seat belt sign was off, I jumped at the opportunity to ask the Congressman two brief questions relating to The Dodd-Frank revisions/repeal.

Question#1–will the CFPB go away

Answer –no way

Question #2 -will the 3 limit be revised to 24, meaning the # of seller financied transactions an indivdual can have in a 12 month period.

Answer – Absolutely. This will happen in late 2107.

Thank you Congressman Schweikert for all your help. You are a friend to the real estate community.

As the Trump presidency takes hold, the debate over Dodd-Frank is growing. President Donald Trump has promised to dismantle the banking reform act. Fed Chief Janet Yellen has promised to defend it. Congress has the power to change it. And, the battle has already begun.

The House just passed an amendment to the Dodd-Frank Act that could be the beginning of its unraveling. Although this bill isn’t expected to pass in the Senate during President Obama’s final days, it provides a glimpse of the fight ahead, under a Trump administration.

The amendment that passed would change the way that federal regulators determine how important a bank is to the stability of the nation’s financial system, and how much oversight they should get. Banks that are determined to be crucial, or “too big to fail,” are called “systemically important financial institutions” – or SIFIs.

The threshold for oversight has been an ongoing debate by those who say the regulations are unreasonably harsh on smaller banks. Even the act’s co-author Barney Frank says it should have been more lenient toward smaller banks.

Possible change in oversight

The just-passed bill would change the current threshold for stricter oversight from $50 billion in assets to one that is determined on a case-by-case basis. The Financial Stability Oversight Council would be in charge of making that determination.

Hedge fund manager and former Goldman Sachs partner Steven Mnuchin confirmed to CNBC on Wednesday morning that President-elect Donald Trump has nominated him for the position of Secretary of the U.S. Department of the Treasury.

Trump’s choice of Mnuchin, 53, who served as the President-elect’s national finance chairman during his campaign, is considered controversial because Mnuchin has never worked in government and his roots in Wall Street would seem to conflict with Trump’s anti-financial industry sentiment during his campaign.

One area where he does agree with Trump, however, is the need for reduced regulation. Mnuchin laid out a number of his initiatives on CNBC’s Squawk Box, should the U.S. Senate confirm him as the 77th Treasury Secretary. One of those is to roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed in 2010 and is considered by the Obama Administration to be one of its greatest achievements. In various speeches and interviews throughout his campaign and since his election, Trump has vowed to overhaul the controversial financial reform law.

“We (Mnuchin and Trump’s choice for head of the U.S. Department of Commerce, Wilbur Ross, also announced on Wednesday) have been in the business of regional banking, and we understand what it is to make loans,” Mnuchin told CNBC. “That’s the engine of growth to small- and medium-sized businesses. The number one problem with Dodd-Frank is it’s way too complicated and it cuts back lending. So we want to strip back parts of Dodd-Frank that prevent banks from lending, and that’ll be the number one priority on the regulatory side.”

Mnuchin told CNBC that the U.S. economy can sustain a growth level of between 3 and 4 percent. In fact, he called sustained economic growth “our most important priority.”

“It is absolutely critical for the country,” Mnuchin said. “We absolutely can have sustained growth at that level. To get there, our number one priority is tax reform. This will be the largest tax change since Reagan. We’ve talked about this during the campaign. Wilbur and I have worked very closely together on the campaign. We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States. We’re going to get to 15 percent, and we’re going to bring a lot of cash back into the U.S.”

In an interview with Fox Business after the announcement of his nomination, Mnuchin said he believes that the controversial government conservatorship of Fannie Mae and Freddie Mac should end and that the private market should have more of a share in the mortgage market.

“We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control,” Mnuchin said, according to Bloomberg.

“A resolution of the conservatorship of Fannie and Freddie appears likely with Mnuchin as Treasury secretary,” says Tim Rood, Chairman of The Collingwood Group. “His experiences at Dune Capital, particularly the IndyMac/OneWest purchase and turn around, will most certainly influence his decision-making calculus.”

Five Star Institute President and CEO Ed Delgado said of the nomination of Mnuchin for Treasury Secretary: “I anticipate that with this new appointment, Treasury will continue to promote the department’s mission by encouraging a strong economy and creating economic growth and stability. As the economy further recovers from the Great Recession it is imperative that the housing industry and Treasury work in hand and hand to ensure housing and economic prosperity.”

Mnuchin left Goldman Sachs in 2002 after 17 years with the global investment banking firm to become vice chairman of hedge fund ESL, and he later became CEO of another hedge fund, SFM Capital Management. In 2009, Mnuchin and a group of investors purchased the failed Pasadena-based IndyMac bank from the FDIC for $1.5 billion after the mortgage meltdown and renamed the bank OneWest. In the years immediately following the crisis, OneWest’s foreclosure practices generated considerable controversy, particularly in California.

“If he gets the post, Mnuchin will bring a lot of mortgage expertise to the Treasury Department,” says Rick Roque, President of Menlo. “He bought Indymac, renamed it OneWest and then sold that company to CIT Group in 2015. That kind of experience, in addition to his experience in sub-prime origination, retail origination, and correspondent channels will prove to be very valuable to the non-depository mortgage banking market.”

Unlike the late night real estate infomercials where the alleged “gurus” will teach you their great strategies for 100% leverage and how “you too can buy fantastic real estate for no money down”, small business sales are not done that way.

While it can be a risk for a seller, the reality is that most often, seller financing is the only way to get the deal done. Furthermore, for an individual buyer, they want the seller to have “skin in the game” since that may be the only leverage the buyer has over what the seller has represented about the health of the business. After all, if the seller is not willing to back up their claims by absorbing some of the risk, it does not provide too much assurance or comfort to the buyer.

Defaults are rising in a key corner of the commercial real-estate debt market just as borrowing costs are set to jump, raising the likelihood of a slowdown of the $11 trillion U.S. commercial property sector in 2017.

A financial crisis-era regulation is about to take effect that is expected to make some commercial real-estate borrowing more expensive and complicated, analysts said.

At the same time, interest rates have increased since the election of Donald Trump as the nation’s 45th president last week and seem poised for a sustained rise from recent historic lows, which would further squeeze an industry built on borrowed money.

“I can paint a picture that it could be disastrous, with runaway inflation and high interest rates,” said Charlie Bendit, co-chief executive of Taconic Investment Partners LLC, at a New York industry luncheon last week.

The worries raise fresh concerns for the commercial property market as it enters its eighth year of expansion.

Already, landlords are battling a slowdown in sales and rising vacancy rates of multifamily housing units across the U.S. and of office space in Houston, Washington, D.C., and other big markets. Commercial property sales volume was down 8.6% in the first nine months of 2016 to $345.4 billion, according to Real Capital Analytics.

Now defaults are on the rise as well. More than 5.6% of some $390 billion worth of commercial property mortgages that have been packaged into securities was more than 60 days late in payment in September, according to Moody’s Investors Service. That was up from a 4.6% delinquency rate earlier this year.

The culprit: loose lending before the financial crisis. Ten-year loans issued in 2006 and 2007 are now coming due, and many borrowers aren’t able to pay them off despite rising property values.

In all, Morningstar Credit Ratings LLC predicts borrowers won’t be able to pay off roughly 40% of the commercial mortgage-backed securities loans coming due next year. Suburban office properties and shopping centers are being hit particularly hard, said Edward Dittmer, a Morningstar vice president.

The Consumer Financial Protection Bureau is likely to be reigned in if not rendered impotent or even abolished under President Trump. He has said he would come “close to dismantling” it along with Dodd-Frank. That is good news for small business, consumers, the economy in general — and note investors.

The CFPB is the brainchild of super-liberal Massachusetts Sen. Elizabeth “Pocahontas” Warren, who never met a business she doesn’t want to regulate.

“At stake is the agency’s aggressive approach to regulating credit and prepaid cards, mortgages, payday and student loans, debt collection, credit reporting and other areas of consumer finance since opening for business in 2011.”

WASHINGTON, Nov. 11, 2016 — Donald Trump has taken the first step to fulfill his campaign promise to “dismantle” Dodd-Frank and the Consumer Financial Protection Bureau. He is considering one of the leading critics of Dodd-Frank on Capitol Hill, Rep. Jeb Hensarling, as Treasury Secretary.

Mr. Hensarling last year laid out a blueprint for replacing Dodd-Frank that many observers view as a starting point. In an interview Thursday, he said the Trump team’s statement “is music to my ears,” and that he planned to make the bill, dubbed the Financial CHOICE Act, his top priority next year.

He said he had spoken with Mr. Trump’s team about the matter in the past, adding: “I think they like the thrust of the legislation and many major components of it.”

As for the prospect of him taking the Treasury slot, the Texas lawmaker said he would “certainly have the discussion” if the Trump administration comes calling, “but I’m not anticipating the telephone call.”

The transition team’s blueprint on the president-elect’s website states that the Trump team “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

The president-elect has tapped Paul Atkins, a former Republican member of the Securities and Exchange Commission and longtime Dodd-Frank critic, to recommend policies on financial regulation. An aide to Mr. Atkins, who heads a financial regulation consulting firm, referred requests for comment to the Trump transition team, which couldn’t be reached.

Mr. Hensarling’s bill is built around a trade-off: Banks can free themselves from various regulations, such as tough stress testing, as long as they maintain capital equal to at least 10% of total assets and high ratings from their regulator.

That would immediately help many small locally focused banks that tend to be better capitalized, but not necessarily megabanks with sprawling international operations that generally have capital levels below that level.

In the interview, Mr. Hensarling said he would try to convince Mr. Trump’s team to support his approach instead of their campaign-trail promise to reinstate the Depression-era Glass-Steagall law separating traditional lending from investment banking.

Mr. Hensarling’s bill also would make other significant changes, such as requiring that many financial regulations be subject to cost-benefit analysis for the first time and tying the budgets of regulatory agencies, including the CFPB, to congressional appropriations.

The CFPB has enjoyed a high level of independence by getting its funds from revenues insulated from the legislative process.

It is possible Senate Democrats could seek to block GOP efforts they view as overreach, but lobbyists and congressional aides are optimistic that some moderate Democrats up for re-election in 2018 in states that voted for Mr. Trump will be inclined to compromise. Republicans also may come under pressure to change the Senate rules to ease passage of controversial legislation, but it is far from clear they would make that move.

Our take:

The proposed Seller Finance Enhancement Act – HR 5301…, an amendment to the Dodd/Frank legistation is way over due

This bill rolls back some of the excessive regulations of Dodd/Frank by allowing Seller Financed transactions to expand from 3 in a rolling 12 month period to 24 in a year.

While this is not a massive change, it will provide significant relief for the vast number of real estate investors who choose to seller finance property.

If you were to rely solely on the marketing campaigns of the banks, it would be easy to think they have their vaults open ready to lend money to people looking to buy a business. While there has been some significant easing of their purse strings recently, seller participation in financing a significant portion of a business for sale remains constant, especially in smaller transactions.

In deals under $1.0 million, where an owner-operator business is being sold to an individual buyer who intends to take over the seller’s daily role, seller financing has always been the most dominant source of funding. This is mainly due to buyers unwillingness or inability to meet rigid bank collateral requirements. It is the old story of the banks offering to lend whatever amount the buyer can fully collateralize, and the buyer simply not being able to secure the entire loan (isn’t that why they go to the bank in the first place?).

While it can be a risk for a seller, the reality is that most often, seller financing is the only way to get the deal done. Furthermore, for an individual buyer, they want the seller to have “skin in the game” since that may be the only leverage the buyer has over what the seller has represented about the health of the business. After all, if the seller is not willing to back up their claims by absorbing some of the risk, it does not provide too much assurance or comfort to the buyer.

Unlike the late night real estate infomercials where the alleged “gurus” will teach you their great strategies for 100% leverage and how “you too can buy fantastic real estate for no money down”, small business sales are not done that way. While leverage plays a role, buyers have to come to the table with a deposit. For an individual buyer with limited resources, the risk can be great and that concern, coupled with few available lending sources, has meant that seller-financed deals is the norm in these size deals.Jim Sinclair, Senior Vice President of Murphy Business & Financial Corporation LLC, a national business broker and M & A firm, advises his seller clients to “act like a bank if they are going to offer financing to the buyer.” To this end, he urges them to do a thorough background and credit check on the buyers. Sinclair says that while deals vary greatly, “under the right scenario, a buyer can expect the seller to carry a maximum of 50% of the total purchase price as a balance of sale.”

One major change Sinclair has seen recently is that several banks have lowered their minimum deal size from $500,000 to around $350,000. This is great news for individual buyers as they now have another option where none existed before.

Once the deal size starts to increase, the percentages and amounts that banks will contribute increases commensurately. The most common form of bank financing to individual business buyers has been from those institutions participating in the Small Business Administration’s 7(a) loan program. Under the SBA umbrella, the government guarantees a percentage of the loan that a bank will make. There is very specific criteria regarding the SBA 7(a) program eligibility and collateral guidelines, and while the government essentially guarantees part of the loan, the banks must be in compliance and the buyers must meet other specific guidelines.

John Martinka, of Martinka Consulting, a Washington state mid-market mergers and acquisitions firm, was involved in a deal recently representing the buyer in the purchase of a Washington-based fabrication business. In that deal, “a competing buyer to his client could not get approved for financing and the suspicion is he would not personally guarantee the loan or put up his house” as collateral.” Martinka also explained that “relevant business experience, meaning some management experience by the buyer is a requirement.”Martinka is typically involved in deals under $10.0 million and regardless of the percentage of bank financing, he notes that a portion of all of the deals include some participation by the seller in the financing. In other words, the banks want to see the seller absorbing some of the risk as well.

While banks may be softening their stance regarding deal size, buyers cannot escape having to be qualified financially and experience-wise, and must be willing to personally guarantee the loan. This is also the case with seller-based financing although in these instances, while personal guarantees are required, the assets of the business, rather than personal ones, are usually pledged by the buyer. Similarly, when selling a business, the owners need to realize that they are going to have to participate in the financing to some extent. The smaller the deal; the more they have to fund it. While every seller would obviously would prefer an all-cash deal, those deal terms are not common. No matter how badly the parties want to do a deal, both sides need to keep an open mind regarding the financing terms because nothing gets done without funding.

Acquiring income producing property is one of the best ways to create wealth and achieve one’s long term financial objectives. However, at some point, many investors tire of managing their properties. If you are an absentee landlord, this may experience this soone r than later. Of course the natural question is…. if owning real estate is not as glamorous or as easy as is promoted, what else does one do to create wealth? The stock market? Well maybe not—this year’s average returns are roughly 2% with a lot of risk like playing in a casino.

For example two seasoned investor friends bought several lower price band rental properties in Birmingham, Chicago, Indianapolis and Milwaukee. They were convinced their target 20% cap rate was very a reasonable. Now after 2 years, multiple property managers, handymen, evictions, code violations, phantom tenants etc, they saw their very easy projected cap rate drop to more like 6-7%. The stress, worry and frustration really began to take their toll.

Friend #1, Jason, decided to just bail and sell. He is putting his money into group foster homes. If professionally operated he will generate a serious return and satisfy his passion-to help kids, get his wife out of work, not to mention the serious cash flow. Friend #2, Dan, has decided to sell his properties and be the bank with seller financing. He decided to turn all the tenant worries into mail box money. He doesn’t want a job, just the cash flow.

Dan and I discussed the variables. As a seasoned note guy and seller carry consultant I made several recommendations to Dan on how to structure the transactions. We discussed the pros and cons. How to structure the transaction– to make a long term play with minimal risk. I was able to utilize my years of real estate experience and note structuring basics to demonstrate to him how, if structured properly he could generate a safe and reliable 10%+ return on his investment. A quantifiable and predictable rate of return.

When structuring a seller carry back, Dan is taking a very proactive approach—focusing on six primary underwriting areas. While his goal is to quickly sell his rentals, above market pricing, he wants to mitigate risk and maximize his return and still keep his options open in the event he wants to sell his seller carry back note in the future and avoid a deep discount(haircut) on the note resale. He is not just selling to anyone with a pulse thus minimizing risk and no stress .

Dan is implementing the following underwriting criteria.

The Borrower –pulling credit and making sure the borrower is putting down at least 15-20%, thus the buyer will be a bankable risk and has real skin in the game.

The asset value—sell the asset at no more than 10% over market value

Interest rate—charge at least 8% if not 10%, but still within the guidelines of Dodd-Frank

Term—keeping it as short as possible-10-20 years

Paperwork—use a title company to draft the note, deed of trust/mortgage and provide a closing statement proving the down payment. Utilizing a MLO to qualify the buyer and work within the current guidelines of the Dodd-Frank Act. FYI–buyer pays for this service.

Escrow— Require escrows for taxes and insurance

Proof of monthly payments—setting up a loan servicing company to collect the monthly PITI and disburse monthly as instructed. The buyer pays the servicing fee.

The net result is:

Never worry about dealing with tenants or property maintenance

Maximize the sales price

Defer capital gains

Keep your equity working for you usually at rates 35x higher than with a bank CD and significantly safer than the stock market

Investing in real estate notes with your IRA is one of the most popular self-directed IRA investments available. But with this popularity comes common mistakes when people lend their IRA (and non-IRA) money out, secured by liens on real estate. Follow these 10 tips to avoid potentially costly mistakes when choosing real estate as an IRA self-directed investment.

1) You may end up owning this piece of real estate if your borrower defaults. Never loan on something you wouldn’t want your IRA to own. The risk of loaning your IRA investments toward real estate notes is matched by the reward: I routinely see yields from these loans at 12% and higher; however, borrowers can default and you may be left with the property in foreclosure. If you would be upset by the potential of taking over this property in foreclosure, you probably should not make the loan.

2) Do not advance IRA money for home repairs until the repairs are finished; then have the repairs inspected before advancing the money. This is one of the biggest mistakes that I see clients make with their IRAs. They fund the full loan amount expecting that the repairs will be done on the property, but the borrower will actually need a little more money on another. If the loan goes bad, the IRA could end up with a property that hasn’t had the necessary repairs.

3) Do not loan money to someone you would feel uncomfortable foreclosing on. William Shakespeare wrote in Hamlet, “Neither a borrower nor a lender be/ For loan oft loses both itself and friend/ And borrowing dulls the edge of husbandry.” For the most part, I cannot agree with this advice, because lending and borrowing money drives our economy and increases economic activity. However, the part about a loan losing a friend is absolutely correct, in my opinion. If foreclosing on your borrower would cause you heartache, it is better not to make the loan. I have seen friendships destroyed over a loan gone bad.

4) If the loan goes into default, take action immediately. No one wants to admit that he or she has made a mistake in self-directed investing, but delaying action can be costly. You can always stop the foreclosure process once it has begun, but you cannot complete the process unless you start it.

5) Collect interest monthly so you will know if the borrower is getting into trouble. Many borrowers, especially investors, would prefer to pay interest at the end of the loan. But this exposes the lender to additional risk. The purpose of collecting payments monthly is both to:

Make sure the borrower remembers that he or she has to do something with that property in order to avoid the pain of the payment

Let you know if the borrower is in trouble because he or she starts missing payments

Keep in mind that unless you have contracted for monthly payments, you may not be able to foreclose, even if you do discover that the borrower is in financial trouble, because the loan may not be in default. This has actually happened to some of my clients.

6) If you are unsure about how to evaluate the loan, hire a professional to help you. Although a hallmark of the self-directed IRA is that it is “self-directed” — meaning that you make your own decisions and find your own investments — most IRA owners either do not possess sufficient knowledge or, in my case, sufficient time, to properly evaluate a loan transaction. My solution is to hire a professional to help me with the deals. He checks out the borrower, coordinates with the title company, orders the appraisal and usually a survey, makes sure insurance is in place and generally evaluates the loan. Naturally, he charges a fee for this service, which is passed through to the borrower on top of any interest and fees that my retirement plan may charge. This increases the cost of the loan; but in this case, the non-Biblical version of the golden rule applies, which is “He who has the gold makes the rules.”

7) Get title insurance for the loan. The purpose of title insurance is to shift risk away from you and to the title company. In Texas, where my office is, the incremental cost of title insurance is very small when issued in conjunction with an owner’s title policy. Regardless of the cost, making sure that your IRA is protected from title flaws is important.

8) Verify that hazard and, if necessary, flood insurance is in place, naming your IRA as an additional insured. It is very easy to miss this issue when you are trying to get everything completed right before a closing. Borrowers may get insurance at the last moment and simply forget to add your IRA as an insured. But if something goes wrong, you will want to make sure your IRA is named on the check.

9) Insist that the borrower provides you with evidence of payment when property taxes and homeowners association fees become due. The same thing would apply to hazard and flood insurance premiums, although normally you would receive notice of cancellation for non-payment of those bills. Depending on where you live, property tax bills can increase quickly due to penalties and court costs, which reduces your equity position in the property.

10) Get a personal guarantee if lending to an entity or to an individual with some weakness. When things are going well, you might be tempted not to insist on a personal guarantee, and indeed many borrowers will resist this. However, as we all have discovered recently, circumstances do change, and a personal guarantee may be helpful in collecting the debt. I collected on a note once where the property had decreased substantially in value due to vandalism and market conditions. Instead of foreclosing, I had my lawyer send a letter explaining to the guarantor, who had a significant amount of assets, that he was personally liable on the debt and that if he were unable to satisfy the note, I would pursue legal action against him and the borrower. A week later, a cashier’s check showed up that satisfied the lien.

There’s more to know when considering real estate for your self-directed IRA
This list of suggestions is not meant to be exhaustive. Other issues you will need to understand include:

Your lien position (personally, I only invest in first-lien loans)

Any state usury laws that might apply to the loan

At least a general idea of what the foreclosure process is in your state, in case the loan goes into default

Always get good legal counsel to assist you with loan documentation. Because the borrower traditionally pays for all expenses including legal fees, there is no reason not to have an attorney draw up loan documents.

Lending can be an excellent investment in an IRA. It is relatively easy to do and, if done correctly, has a comparatively low risk. Getting to know successful real estate entrepreneurs who borrow your IRA money may also lead to other, intangible benefits as well. Finally, be sure to learn the pointers for buying real estate with your self-directed IRA before you take any actions.